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The Gulf Oil Spill:
Economics and Policy Issues
by Brian Roach, Jonathan M. Harris, and Adrian Williamson

A GDAE Teaching Module on Social and Environmental Issues in Economics

Global Development And Environment Institute Tufts University Medford, MA 02155

Copyright © 2010 Global Development And Environment Institute, Tufts University. Copyright release ishereby granted for instructors to copy this module for instructional purposes. Students may also download the module directly from Comments and feedback from course use are welcomed: Global Development And Environment Institute Tufts University Medford, MA 02155 E-mail:

Photo Source: U.S. Coast Guard


On April 20, an explosion on the Deepwater Horizon oil rig, located in the Gulf of Mexico about 40 miles off the Louisiana coast, killed 11 workers. The rig burned out of control and sank on April 22. Several days later it was revealed that the rig’s wellhead was damaged and significant amounts of oil were leaking in to the Gulf of Mexico. TheDeepwater Horizon soon became the largest oil spill in U.S. history, easily surpassing the 1989 Exxon Valdez tanker accident. In August 2010, Federal science and engineering teams estimated that the oil flow from the well was 53,000-62,000 barrels a day from April until the well was capped on July 15th. 1,2 This is equivalent to a spill the size of the 1989 Exxon Valdez spill – formerly the largest spillin U.S. waters -- every 4 to 5 days. 3 The Deepwater Horizon spill raises numerous questions about energy, economics, and the environment. In this module we consider various aspects of the Deepwater Horizon spill, including its economic impacts, its implications for offshore oil development, and its lessons for national and global energy policy. How can we evaluate the economic damages of oilspills? While some economic costs are relatively easy to estimate, such as the lost profits of the commercial fishing industry, other damages such as lost ecological and esthetic values are more difficult to quantify. The laws that apply to oil spills mandate that ecological restoration be undertaken as compensation for damages. We’ll consider preliminary data on the likely economic costs of theDeepwater Horizon spill, noting that the ecological damages to habitats and wildlife are likely to be greater than market-based costs such as lost fishing and tourism profits. A major issue raised by the Gulf oil spill is the economic analysis of risk. A catastrophic oil spill is an example of a low-probability, high-impact event. How should we develop policies in the presence of such risks? Isstandard risk analysis the appropriate tool, or should we pursue a more cautious approach? This debate has important implications for other issues where catastrophic risk is at issue, such as global climate change and nuclear power. Economics teaches us that the efficient price for a good or service should reflect all social costs and benefits, not just the market interaction of supply and demand. We’llreview the research on what the true cost of oil should be, and how efficient pricing could benefit society. Finally, we will explore how oil dependence could be dramatically reduced. We’ll assess various policy proposals that seek to provide appropriate price signals, increase energy efficiency, and encourage a transition to cleaner energy sources.

1 2

A barrel of oil is 42 gallons. Thus35,000 barrels of oil is equivalent to 1,470,000 gallons. Gulf Spill is Largest of Its Kind, Scientists Say,” New York Times, August 3, 2010. 3 Calculation based on a spill size of 10.8 million gallons for the Exxon Valdez. See “New Estimates Double Rate of Oil Flowing Into Gulf,” New York Times, June 10, 2010.


Deepwater Oil...